As one might expect, the chief executive officer of Prada (1913:HK), Patrizio Bertelli has a somewhat snobby take on U.S. department stores: They’re too low-rent, what with never-ending discounts. “They seem to be on a permanent end-of-season sales mode,” Bertelli said during a conference call late on Friday.
Even for Prada, a brand that would rather die than be caught in an “everything-must-go” situation, this is a growing problem. “They are not interested in promoting products and brands while in display, because they are constantly engaged in markdowns,” Bertelli said. Translation: “If you’re the type of consumer who buys $450 sneakers, you’re focused on the shoes, not the price.”
Prada, which also owns Miu Miu brand stores, is increasingly going its own way. The company has virtually cut off its stream of goods that flow through wholesale channels. This year, Prada opened 66 stores that it operates directly, bringing its total to 516. Another 80 locations are planned for 2014. The change is dramatic: In the most recent quarter, 86 percent of its revenue (PDF) came directly through its stores and websites, up from 53 percent five years ago.
“It would be a pretty easy thing for us to sell €100 million [$136.6 million] or €200 million more through wholesale accounts, but it’s very detrimental in terms of brand image,” Bertelli said. “We’d rather stay away from that.”
For retailers at all levels, the calculus of sales and discounts is getting trickier. Shoppers have gotten accustomed—some would say addicted—to buying at markdowns; J.C. Penney (JCP) tried to wean customers off coupons last year and then experienced plummeting sales and the disappearance of more than half its market value. This fall, Gap (GAP) CEO Glenn Murphy said the retail industry, on a whole, has become predictable, with blanket sales that “look like wallpaper, day-in and day-out.” The imprecise approach has prompted consumers to expect even bigger deals, he argued.
But as customers insist on a deal, Wall Street—and now, perhaps, suppliers—fear a race to the bottom. While department stores might need sales to lure shoppers, at least some luxury labels don’t. As Prada slowly exited big-box retailers in the past five years, its profit margin climbed from 6 percent to 19 percent. (That’s net profit, not operating or EBITDA or any other rose-tinted metric.)
While Michael Kors (KORS) is more bullish on the wholesale business, it’s burnishing its retail channel, too. In the recent quarter, Kors opened 24 stores, bringing its tally to 477.
The more blue-blood brands ditch big boxes and go it alone with spiffy Web stores and slick boutiques, such stores as Macy’s (M) evolve toward being glorified outlet barns. For retail locations trying to please a wide range of the socioeconomic spectrum, hanging onto shoppers might prove easier than staying stocked with stuff to buy.